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Times’ Columnist Asks: What’s Behind Deficit Hysteria?

Posted on February 5 2010 10:21 am
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New York Times op-ed columnist Paul Krugman does not believe that tripling the federal deficit in one year’s time is anything to be concerned about.  He compares what he calls “fiscal scare tactics” to the “fear-mongering on weapons of mass destruction.”

Mr. Krugman needs some lessons in basic economics and the law of unintended consequences.  The rapidly growing deficits are hurting our country right now.

First off, massive federal debt – with annual deficits projected of over a trillion dollars as far as the eye can see – crowds out private firms that are seeking credit.  This cuts off investments that could create many new jobs – real jobs, not the phony ones being attributed to Obama’s stimulus plan.

The run-away deficit is making us more beholden to the biggest buyer of our debt, China, which is busy cutting its imports and expanding its exports.  China’s economic leverage – and hence its political leverage – is increasing at an alarming rate and in linear proportion to their control of much of our debt.

And as the Federal Reserve prints more and more money to keep up, the value of the dollar continues to slide downward.  The slide, in turn, is accelerating moves in China and elsewhere around the world to press for replacement of the dollar as the world’s de facto global reserve currency.  If that happens – and Nobel Laureate economist Joseph Stiglitz said that it could start to happen as early as this year –  the U.S. government will no longer be able to borrow money at a comparatively cheap rate, since there will no longer be a significantly larger market for the dollar than for other currencies. This will have a ripple effect throughout our economy.

Americans will end up paying much higher interest rates on their credit purchases, including automobiles and houses.  With consumer demand drying up, our economy could then sink into a catastrophic depression from which we may not recover for many years.

America can do better than becoming a third-rate debtor country.  That takes fiscal discipline, not spending with abandon as the Obama administration is doing.  Instead of squandering the monies being repaid to the government by the big banks that received bail-out funding, why not start down the path of fiscal responsibility by holding the monies in reserve to bring down the deficit?

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